History Says This ETF Could Be the Safest Place to Invest During a Bear Market
Key Points
Because bear markets occur less frequently than bull markets, it's harder to compare ETF performance in bear markets.
During the bear market of 2022, dividend-focused ETFs outperformed the broader market.
This top 2022 performer even outperformed a total bond market ETF.
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History is clear about one thing: Cashing out of stocks and exchange-traded funds (ETFs) during a bear market is one of the worst things an investor can do. The Motley Fool's own research has shown this over and over again.
But it's not enough to know what you shouldn't do during a bear market. If cashing out isn't the best option, where should investors put their money if a bear market is imminent?
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History has an answer for this one, too. Here's the ETF that history says could be the safest place to stash money during a bear market.
Image source: Getty Images.
Dividend stocks tend to outperform in bear markets
Because they offer a regular cash payment to their shareholders, dividend stocks often hold up better during bear markets than other stocks.
That's not to say they don't go down; in a bear market, nearly all stocks decline. However, dividend stocks -- especially if you reinvest the dividends by buying more shares of stock -- tend to go down less than the broader market. The same is true of dividend ETFs.
It's difficult to compare dividend ETFs during bear markets, in large part because bear markets have been so infrequent over the last 20 years that most ETFs haven't existed for more than one or two of them.
But which dividend ETF performed the best in the most recent bear market?
Image source: Getty Images.
This dividend ETF "won" the 2022 bear market
We can look to the 2022 bear market for answers. It lasted from Jan. 3, 2022, through Oct. 12, 2022. During that time, the S&P 500 lost about 25.4% of its value. If you were invested in the Vanguard 500 Index Fund (NYSEMKT: VOO), you would have been down that much.
However, many popular dividend ETFs fared slightly better. The iShares Core Dividend Growth ETF (NYSEMKT: DGRO) only fell 20% during that time, and the Fidelity High Dividend ETF (NYSEMKT: FDVV) slipped just 18.7%.
But one dividend ETF not only outperformed both of them, it even outperformed the Vanguard Total Bond Market Index Fund ETF (NASDAQ: BND), which fell a mere 16% during the 2022 bear market.
That fund is the Vanguard High Dividend Yield Index Fund ETF (NYSEMKT: VYM). During the bear market of 2022, it only fell 14.7%. That not only outperformed the total bond market index fund, but fared more than 10 percentage points better than the S&P 500.
Even better for investors, the Vanguard High Dividend Yield Index Fund ETF continued to outperform during the recovery period. For the whole of 2022, the Vanguard High Dividend Yield Index Fund ETF was only down 3.5%, strongly outperforming the other funds:
| ETF (Ticker) | Performance during 2022 Bear Market |
Overall 2022 Performance |
|---|---|---|
| Vanguard High Dividend Yield ETF (VYM) | (14.7%) | (3.5%) |
| Vanguard Total Bond Market ETF (BND) | (16%) | (15.2%) |
| Fidelity High Dividend ETF (FDVV) | (18.7%) | (7.4%) |
| iShares Core Dividend Growth ETF (DGRO) | (20%) | (10%) |
| Vanguard S&P 500 ETF (VOO) | (25.4%) | (19.5%) |
Source: YCharts.
Of course, there's no guarantee that history will repeat itself in exactly the same way during the next bear market. But the Vanguard High Dividend Yield Index Fund ETF's (admittedly limited) historical track record makes it a top choice for investors looking for the safest place to put their money if a bear market is on the horizon.
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John Bromels has positions in Vanguard Index Funds-Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF, Vanguard S&P 500 ETF, and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
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